The post pandemic period on the bourses has been all about investing in the right sectors. While the entire market is up in the last 15 months on the back of easy liquidity in the financial markets, record low interest rates and a recovery in corporate profits from the lows of June 20 quarter, the rally was led by top companies in sectors that are expected to be the biggest beneficiaries of the post-pandemic economy.
In India, for example, technology, pharma and metal companies have been the rally leaders on the bourses in the last 15 months.
Pandemic boost for the tech sector
The reasons are not not hard to fathom. The economic and technological changes brought about by the COVID19 virus and the global lockdown to spread its transmission hurt the overall economic activity in most countries but it also created new winners. And this is duly reflected on the stocks markets.
The technology sector including e-commerce has been the biggest winner in the post-pandemic period as the lockdown made remote working from home mainstream. The lockdown also boosted online shopping and more and consumers bought lifestyle as well as essentials such as grocery and restaurant meals online.
The same applies to consumers who have got used to the convenience of online shopping and ordering food. All this means an even greater demand for technology in future as more and more services get digitised.
Indian tech and IT services companies such as Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies among others are also expected to benefit from this shift and help global companies to digitise their operations.
Drugs to kill the Virus
The pandemic has also boosted the prospects of the pharma sector and the associated suppliers and manufacturers of chemicals. The biggest gains have been to the legacy pharma companies that had the products or the capability to offer drugs and vaccines to treat COVID19-like infectious diseases.
In fact COVID19 is the biggest-ever vaccine opportunity for the global and Indian pharma companies. It’s a matter of time when the majority of the world population will get a jab to neutralise the virus. The potential global market for vaccine runs into hundreds of billions of US dollars.
Inflation in commodities
The pandemic also disrupted the industrial supply chain globally leading to a shortage of critical raw materials and manufactured goods. This happened at a time when governments in most developed economies made large cash transfer to their population boosting consumer demand. This has fuelled a global rally in commodities such as industrial metals and crude oil and translated into high profits for metal and energy companies.
This is again likely to benefit basic material manufacturers as inflation will boost their prices.
Time for Sectoral Funds
These changes in the broader economy mean that focussed funds or those with a high exposure to the ‘”right sectors” have done better than the classic diversified equity funds that perform well in a secular rally. In fact, the majority of the diversified equity funds have under-performed the broader market in the post-pandemic period. This is because these large cap oriented funds mostly invest in banking and financial stocks and consumer goods companies. Both these sectors have been laggards.
In contrast, sectoral equity funds with high exposure to these post-pandemic winners have done exceedingly well in the last 12-months. And given the structural nature of the changes in the broader economy, there is still some steam left in them.
Here are the top ten sectoral funds in terms of their performance in the last one year. Our analysis is restricted to funds with Assets under Management of Rs 100 crore or above as per data from ICRA Analytics.
Top Sectoral Funds
1. ICICI Prudential Commodities Fund has been the top performing sectoral fund in the last one-year, according to data from ICRA Analytics. The fund has given 192 percent return in the last 12 months against a 60 percent rally in the Sensex and a category average of 82 percent during the period. The fund is largely a play on rally in industrial metals with metal companies such as Tata Steel, Hindalco, SAIL and Vedanta accounting for nearly two-third of its portfolio. With an average P/E multiple of 37x and price to book value of 2.6x, its portfolio is fairly valued with scope for a further upside.
2. ICICI Prudential Technology Fund is at number two with returns of 131 percent in the last 12 months, nearly twice the rise inSensex during the period. As the name suggests, it largely invests in tech companies with a bias towards large cap companies in the sector. Infosys, HCL Technologies and TCS are its top investments accounting for nearly 40 percent of the portfolio. Its portfolio is currently valued at a P/E multiple of 42x, which is on the higher side and could limit the upside but the fund is also a good hedge against volatility in the broader market.
3. Aditya Birla Sunlife Digital Fund is in third place with 12-months returns of 111 percent. As the name suggests it also largely invests in tech companies but its investment picks are more value oriented and it has a larger exposure to mid and small cap stocks in the sector compared to many of its peers. Its portfolio is relatively less richly valued with P/E multiple of 37x.
4. Tata Digital India Fund is fourth on the list with one-year returns of 107 percent. Its portfolio is one of the most expensive in the category with P/E multiple of nearly 45x, almost 40 percent higher than Sensex valuation. This limits its upside in the near term. The fund is also heavily tilted in favour of large cap stocks.
5. Nippon India Banking Fund is the fifth best sectoral fund with one-year returns of 104 percent. The fund largely invests in banks with focus on large caps. ICICI Bank, State Bank of India, HDFC Bank and Axis Bank are its top picks and together account for nearly 50 percent of its portfolio. With a portfolio P/E of 27x and price to book value of 4.7x, it’s one of the cheapest large cap funds around.
Other top performing sectoral funds in the last 12-months include IDFC Infrastructure Fund (up 101 percent in one-year), Aditya Birla Sun Life Infrastructure Fund (up 99percent), ICICI Prudential Infrastructure Fund (up 97.5 percent), Aditya Birla Sunlife Banking & Financial Services Fund (up 95.2 percent) and ICICI Prudential Banking & FInancial Services Fund (up 95 percent).
Take your pick. Happy Investing.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).